Effects of Cash Surrender on Costs

The surrender of a policy by different policyholders of differing health affects the incumbent carrier's costs differently, and the carrier must account for the costs of these surrenders. The health of a policyholder who surrenders a policy affects the costs of insurance carriers because it determines the discounted net death-benefit liability from which the carrier is relieved. Furthermore, the health of a policyholder affects the likelihood that that policyholder will surrender his policy, which magnifies or mitigates the effects of surrenders by members of a given health profile.

If surrender values set at the time of issue are based on the assumption of normal health at surrender and are actuarially fair (competitive), any surrender of a policy by an individual with normal health will not affect the insurance carrier's costs. The amount that the insurance company pays to the individual for the surrender of his policy will equal the corresponding discounted net death benefit liability from which the carrier is relieved (with an adjustment for the insured's transaction costs). Stated differently, the surrender of a policy by a healthy individual simply causes the insurance carrier to exchange two equal costs.

An individual with above-average health is expected to live longer than an individual with normal health, so the ultimate payout by the insurance carrier is further out on the horizon. The carrier's discounted net death benefit liability for an individual with above-average health is thus less than for an individual with normal health. This means that the surrender of a policy by an individual with above-average health reduces the incumbent carrier's discounted net death benefit liability by less than the cost of repurchasing the policy and is thus a losing proposition for the insurance company.

An individual with impaired health, on the other hand, is expected to have a shorter life than an individual with normal health, so the carrier's discounted net death benefit liability is greater than for an individual with normal health. Thus, the surrender of an impaired policy decreases the incumbent carrier's discounted net death benefit liability by more than the cost of repurchasing the policy. Surrenders of impaired policies actually decrease the expected costs to incumbent insurance carriers of issuing a policy. CONTINUED

Life Settlement INdustry News 06/20/05

Life Settlements and Real Estate Investing Cash from Life Settlements can boost real estate holdings.Many seniors do not realize that there are no restrictions on the use of their Life Settlement proceeds...

More About Premium Financing
04/26/05

Premium Financing. Affluent insureds can use leverage to buy life insurance using recourse and non-recourse premium financing. After two years, the coverage may be sold as a Life Settlement, or retained....

More About Premium Financing Life Settlement Questions Call 1-877-224-2200
Site Map

09/20/04 Preliminary Life Settlement Quotes Every policy holder and advisor. More..


09/01/04 The End of Costly Insurance Premiums In addition to providing cash, life settlements. More...


08/24/04 Life Settlements used for Estate Planning offer opportunities for professionals. More...


08/03/04 Life Settlement Market Benefits. What if a policyholder's preferences change. More...

Life Settlement Questions Call 1-877-224-2200
American Viatical
l